Question

A company paid the $1,350 premium on a three-year insurance policy on April 1, 2020. The policy gave protection beginning on that date. How many dollars of the premium will appear as an expense on the calendar year 2020 income statement assuming the accrual basis of accounting? Assuming the cash basis of accounting?

Answer 1

Answer:Under accural basis of accounting: $1,012.5(1350*9/12) for the year 2020 and $337.5(1350*3/12) for the year 2021.

Under Accrual basis of accounting , deduction of expenses are claimed in accordance with the same mathcing principle used for GAAP. As a result, expenses can be deducted in the period they are accrued for.

Under cash basis of accounting: the whole sum of $1,350 will be deducted in the year 2020 as this payment benefits is for 12 months only and it is not beyond the end of 2021.

Under Cash basis of accounting, generally, expenses are deductible when paid.

Exception: Capital expenses/prepayments that result in a benfit that extends substantially beyond the end of the tax year are not deducted immediately. However,(exception to the exception) this exception does not apply if the benefits doesnt not extend beyond 12 months after the first date of receipt of benefit AND beyond the end of the taxable year(in this case year 2021) following the taxable year in which payment is made.